Economic Watch

What is the real story behind the Absa saga?

It is difficult to fathom why the so-called ‘Absa bailout’ is back in the news, but how it started, is crystal clear and fully understandable.

The present controversy erupted after a provisional report on the matter was leaked to The Mail and Guardian.

It comes more than three decades after it all started in 1985 when Bankorp – then a subsidiary of Sanlam with no formal ties to Absa – received “bailout” assistance from the South African Reserve Bank (SARB). The assistance was in the form of loans (R1.1 billion at 1% pa) to Bankorp between 1985 and 1992, and continued until 1995 after Absa bought Bankorp from Sanlam in 1992.

It also comes 16 years after an official investigative panel, chaired by Judge Denis Davis, found that Absa paid fair value for Bankorp and expressed no criticism of this transaction.

The Davis panel also found that Absa’s shareholders did not derive any undue benefit from the SARB’s intervention, and as such no claim of restitution could be pursued against Absa.

It did, however, find that “although the decision to provide financial assistance to Bankorp was, for that reason, justified, the form and structure of Reserve Bank assistance to Bankorp over a decade from 1985 (including its continuation in the form of assistance to Absa) was seriously flawed, when considered as a whole”.

This criticism is in line with that levelled at bank bailouts across the globe, including in the USA, both in the 1980s and after the financial crisis of 2007/08.

The Public Protector (PP), Busisiwe Mkhwebane, denied she was responsible for the leaking of the provisional report and said the report was preliminary and that she was awaiting feedback from the implicated parties – “information which might change the final report drastically”. (Our emphasis.)

However, it is curious that the provisional report totally ignores the Davis panel’s report and almost exclusively relies on a report compiled in 1997 by a British ‘spy’ company, CIEX, This report has since been widely discredited and former SARB governor Tito Mboweni recently described CIEX as “bounty hunters.” (The Intelligence Bulletin will be taking a closer look at the dark world of private spies for hire.)

Historical background

The Bankorp bailout came at a time when banks in many countries struggled to survive. According to the website Investopedia, data from the US’ Federal Deposit Insurance Corporation’s (FDIC) Division, indicates that “between 1980-1994, a total of 1,617 commercial and savings banks failed. $206.179 billion in assets were held in those failed institutions.”

Another American website, Countrystudies, describes the situation at the time in South Africa as follows: “Negligible growth in the 1980s led to an overall decline in living standards, as population growth far outpaced economic expansion. Per capita GDP declined by more than 10 percent during the decade, and for the average individual, real wealth in 1990 was no higher than it had been in 1970.”

According to South African History Online, in the 1980s “there was a global economic crisis. As a result, the South African currency lost value, the gold price dropped; unemployment and inflation rates were high.” It notes: “The economic crisis … gave momentum to the resistance movement for political change which grew dramatically.

In an article in Biznews, published in November 2013, Hermann Giliomee, former professor of political studies at the University of Cape Town, president of the South African Institute of Race Relations and currently extraordinary professor of history at the Stellenbosch University, wrote about the Bankorp bailout:

“The purpose was to stabilise the Bankorp group and to avoid the severe systemic risk that would occur should the Bankorp group fail to meet its obligations to its depositors. The Reserve Bank secured the capital sum by demanding that the loan be reinvested at the central bank. Sanlam repaid the loan to the Reserve Bank in 1995.”

The “systemic risk” was still present when the ANC came to power in 1994. In fact, it could have been disastrous.

In short, Bankorp at the time one of the four big banks in the country, was “too big to fail” – as the term goes that was used for justifying the bailout of financial institutions during the 2007/08 global financial crisis – a crisis which is still lingering.

As Giliomee points out, it was also not only Bankorp and later Absa, which received assistance. “Nedbank, for instance, precipitated the country’s financial crisis in 1985 by recklessly failing to take cover in foreign transactions,” he wrote.

The Davis panel in fact “criticised some ‘individual undesirable features’ of the assistance given Bankorp and other banks, but also found that the intervention in the case of Bankorp was ’justified’”.

Likewise, the ex-judge Willem Heath in 1999, as then head of the Special Investigative Unit, declined to institute claims against Absa on the advice that doing so might create a run on the bank with the risk of this spreading to other banks.

Davis identified the main “beneficiaries” as Sanlam policy holders and pension fund members and not the bank or Sanlam and their shareholders.

Back to the present

Against this background, it is curious that the whole matter now, more than two decades and several investigations later, is suddenly forced back onto to the public agenda, and in such a selective, one-side way.

Besides the multitude of conspiracies it has spawned already – from Gupta involvement to own interest-driven political agendas – the timing of it is most unfortunate.

It comes at a time South Africa can ill afford scaring investors off or undermining the trust in the integrity of public institutions like the PP and SARB, with Team South Africa at the World Economic Forum conference in Switzerland to promote the country as an investment destination and with the danger of a sovereign credit downgrade ever-present.